A jury Nov. 14 ordered ExxonMobil Corp. to pay $11.9 billion in damages to Alabama after finding the company committed fraud by underpaying gas royalties for Mobile Bay state leases.
The punitive damages were $2 billion higher than even the state had asked for and ExxonMobil officials said the verdict was excessive and it would appeal.
"The company did not engage in fraud, no evidence of fraud was established at trial, and fraud should never have been considered by the jury," said Sam Franklin, lead counsel for ExxonMobil. "The punitive award in this case defies common sense.
"In addition to being unjustified, the $11.9 billion punitive award is excessive—more than 180 times the $63.5 million in compensatory damages. We intend to appeal this decision to the Alabama Supreme Court in light of the recent US Supreme Court decision in Campbell vs. State Farm that limits the size of punitive awards," said Franklin. State attorneys said the company knowingly cheated Alabama out of revenue because ExxonMobil predecessor Exxon Corp. insisted on deducting transportation costs it knew were not provided for in the lease agreement.
ExxonMobil lawyers argued that even though the lease was poorly written, the company still acted in good faith when it paid royalties and sought to resolve its disagreement with the state through a settlement.
Alabama regulators in 1997 said leaseholder Exxon was not paying enough royalties because the lease called for payments based on gross proceeds; Exxon contended the lease allowed the company to deduct certain transportation costs. In 1999, the state sued Exxon for fraud. The company merged with Mobil Corp. that same year.
Disputes over transportation allowances are not unique to state courts; companies with federal leases also have disagreed with the US Department of the Interior over conflicting interpretations of royalty conditions and deductions. Under a pending energy bill, DOI would be given authority to dramatically expand royalty collection programs called royalty in-kind that allow a company to meet its financial lease obligations through production instead of cash. Industry groups favor RIK because they say it reduces litigation and removes many disagreements over what can be deducted. RIK critics maintain that the government ultimately gets less revenue because it is not as well equip- ped or as knowledgeable as industry to market the oil and gas.
Years ahead
Both parties acknowledge it could be years before the matter gets settled if the two parties rely on the court system to arbitrate the dispute. State attorneys predicted it could be several months before ExxonMobil can even make its case to the state Supreme Court. That's because the company will first ask the state circuit court judge who has pre- sided over this and an earlier case to set aside the verdict.
That hearing has not been scheduled, but state officials anticipate Montgomery Circuit Court Judge Tracey McCooey will allow the verdict to stand because she preserved an earlier punitive award of $3.5 billion when the case came before her court in 2000.
In 2002 the Alabama Supreme Court reversed her first verdict, but only for a procedural reason; judges said the jury should not have been allowed to see an internal ExxonMobil memo that detailed the company's legal strategy.
Other industry impacts
The 2000 award was based on three times the expected profit over the life of the field, estimated to be 30 years. ExxonMobil might not be the only oil company that goes to trial; state officials say there are four similar cases against other oil companies.
Oil company officials have suggested the jury may be sympathetic to a budget crisis facing the state. But local officials have said Alabama has a strong case, and noted the judge instructed both sides not to discuss the state's financial condition. State officials further noted that by the time this and other cases are finished its treasury might be back in the black.
As for the impact on ExxonMobil, aside from large legal fees the case has not appeared to damage the supermajor's standing on Wall Street. Similarly, the company stock prices appeared to be completely unaffected by the jury decision.
